Thursday, July 13, 2017

Trendy Trudeau's Spendthrift Canada Facing Financial Apocalypse

In response to the financial crisis of 2008, governments opted to save the banks, which they did by printing money, trillions of it, and lending it to the banks for free or thereabouts. The banks promptly lent out the free cash real cheap. Canadians responded rationally — borrowing at below inflation and investing in real assets, chiefly houses.

The result, massive house price inflation that only incited further investment in housing, until even with dirt cheap money, people were spending more on debt service than ever before.

Not to worry. Short of cash? Borrow some more.

But now central banks have begun thinking it's time to get interest rates back to “normal.”

But how?

Folks have borrowed not only to buy houses but to cover living expenses, including fancy cars, outdoor kitchens, global travel.

And the corporate sector isn’t in much better shape. Business may have invested for a profit, but with below inflation loan capital and a global recession they haven’t been too successful making a return on investment. Think Tesla: cars, rockets, hyperloops, batteries and roof-top solar. But where’s the profit? Amazon has a profit but it's very small. In fact, relative to market cap, the business sector has rarely been so unprofitable.

So how’s everyone to pay back their loans as interest rates rise and Canadian RE crashes?

“More Disruptive than People Think. We’ve never had QE like this before, and we’ve never had unwinding like this before ... Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before.”

And judging by the size of Canada's housing bubble, the depressed state of the Canadian economy and the feeble-mindedness at the political center, the unwinding seems likely to be even more difficult in Canada than in the US. One may feel some sympathy with those who have been shut out of the real estate market by sky high prices, but one may, in the future, have reason to feel greater sympathy for those who were not shut out of the real estate market by sky high prices.

2 comments:

Interesting article! I have long thought that either we are going to have excessively high rates of inflation so that prices across the economy as a whole catch up with house prices, or the housing bubble is going to burst and bring house prices down substantially as happened in Vancouver in the early 80s.

Either way the blame lies with governments who have allowed housing to be treated as a speculative commodity rather than a home for people -- and they have boosted this enormous increases in house prices by taking the downside risk of mortgage lending away from banks by ensuring them against losses whilst at the same time providing banks with practically free money through QE, etc.